The Problem of Adverse Selection Helps to Explain

question 69

Multiple Choice

The problem of adverse selection helps to explain

• A)why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from securities markets.
• B)why collateral is an important feature of consumer,but not business,debt contracts.
• C)why direct finance is more important than indirect finance as a source of business finance.
• D)why lenders refuse loans to individuals with high net worth.

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Definitions:

Consolidated Income Tax Return

A single income tax return filed by a parent company that includes all incomes, deductions, and credits of all members of a corporate group.

Intra-entity Transfers

Transactions of assets, services, or funds between divisions, departments, or units within the same entity.

Voting Stock

Stocks that grant the holder voting power regarding corporate governance and the selection of the board of directors.

Foreign Corporation

A company that is incorporated in one country but conducts business operations in another country.